REGIS CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our consolidated financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. This MD&A should be read in conjunction with the MD&A included in our June 30, 2020 Annual Report on Form 10-K and other documents filed or furnished with the Securities and Exchange Commission (SEC) during the current fiscal year. MANAGEMENT’S OVERVIEW Regis Corporation (RGS) franchises, owns, and operates beauty salons. As of March 31, 2021, the Company franchised, owned or held ownership interests in 6,221 worldwide locations. Our locations consisted of 6,143 system-wide North American and International salons, and in 78 locations we maintained a non-controlling ownership interest less than 100 percent. Each of the Company’s salon concepts generally offer similar salon products and services and serve the mass market. As of March 31, 2021, we had approximately 4,000 corporate employees worldwide. Impact of COVID-19 on Business Operations During the period ended March 31, 2021, the global coronavirus pandemic (COVID-19) had an adverse impact on operations, including prolonged government-mandated salon closures in California and Ontario, in addition to other U.S. states and Canadian provinces during the three and nine months ended March 31, 2021. The COVID-19 pandemic continues to impact salon guest visits resulting in a significant reduction in revenue and traffic. Due to the economic disruption caused by the COVID-19 pandemic, the Company faces a greater degree of uncertainty than normal in making judgments and estimates needed to apply the Company's significant accounting policies. Actual results and outcomes may differ from management's estimates and assumptions. Merchandising Strategy As part of the Company's transformation to focus on managing and nurturing brands, and in line with its capital-light business, a new merchandise strategy to outsource product distribution was adopted in the third quarter. The Company plans to shifts its product business from a whole-sale model to a third-party distribution model. Management expects the change will positively impact franchisees by providing them access to industry-leading pricing, loyalty programs, promotional benefits, educational assets, and ongoing support. The change will results in a decrease in revenue, cost of product and general and administrative expense going forward. CRITICAL ACCOUNTING POLICIES The interim unaudited Condensed Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the interim unaudited Condensed Consolidated Financial Statements, we are required to make various judgments, estimates and assumptions that could have a significant impact on the results reported in the interim unaudited Condensed Consolidated Financial Statements. We base these estimates on historical experience and other assumptions believed to be reasonable under the circumstances. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made, and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Changes in these estimates could have a material effect on our interim unaudited Condensed Consolidated Financial Statements. Our significant accounting policies can be found in Note 1 to the Consolidated Financial Statements contained in Part II, Item 8 of the June 30, 2020 Annual Report on Form 10-K, as well as Notes 1 and 2 to the unaudited Condensed Consolidated Financial Statements contained within this Quarterly Report on Form 10-Q. We believe the accounting policies related to the valuation of goodwill, the valuation and estimated useful lives of long-lived assets, estimates used in relation to tax liabilities and deferred taxes are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations. Discussion of each of these policies is contained under “Critical Accounting Policies” in Part II, Item 7 of our June 30, 2020 Annual Report on Form 10-K. Our policies related to revenue recognition guidance, ASC Topic 606, can be found in Note 2 to the unaudited Condensed Consolidated Financial Statements. 28 RESULTS OF OPERATIONS Impact of salons sold to franchisees on operations. In the three and nine months ended March 31, 2021, the Company sold 126 and 408, respectively, company-owned salons to franchisees. The impact of these transactions are as follows: Three Months Ended March 31, Increase (Decrease) Nine Months Ended March 31, Increase (Decrease) 2021 2020 2021 2020 (Dollars in thousands) Salons sold to franchisees 126 375 (249) 408 1,363 (955) Cash proceeds received $ 595 $ 18,502 $ (17,907) $ 7,743 $ 87,916 $ (80,173) (Loss) gain on venditions, excluding goodwill derecognition $ (4,575) $ 9,628 $ (14,203) $ (8,463) $ 50,841 $ (59,304) Non-cash goodwill derecognition — (17,486) 17,486 — (76,966) 76,966 Loss from sale of salon assets to franchisees, net $ (4,575) $ (7,858) $ 3,283 $ (8,463) $ (26,125) $ 17,662 System-wide results As we continue to transition to an asset-light franchise platform, our results will be more impacted by our system-wide sales, which include sales by all points of distribution, whether owned by the Company or our franchisees. While we do not record sales by franchisees as revenue, and such sales are not included in our consolidated financial statements, we believe that this operating measure is important in obtaining an understanding of our financial performance. We believe system-wide sales information aids in understanding how we derive royalty revenue and in evaluating performance. System-wide same-store sales by concept are detailed in the table below: Three Months Ended March 31, Nine Months Ended March 31, 2021 2020 2021 2020 SmartStyle (19.6) % (9.5) % (28.7) % (4.8) % Supercuts (22.3) (3.7) (29.9) (1.4) Portfolio Brands (17.9) (4.8) (26.6) (2.7) Consolidated system-wide same store sales (20.7) % (5.4) % (28.7) % (2.7) % _______________________________________________________________________________ (1) System-wide same-store sales are calculated as the total change in sales for system-wide franchise and company-owned locations for more than one year that were open on a specific day of the week during the current period and the corresponding prior period. Quarterly and year-to-date system-wide same-store sales are the sum of the system-wide same-store sales computed on a daily basis. Franchise salons that do not report daily sales are excluded from same-store sales. Locations relocated within a one-mile radius are included in same-store sales as they are considered to have been open in the prior period. System-wide same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation. 29 Condensed Consolidated Results of Operations (Unaudited) The following table sets forth, for the periods indicated, certain information derived from our unaudited Condensed Consolidated Statement of Operations. The percentages are computed as a percent of total consolidated revenues, except as otherwise indicated, and the (decrease) increase is measured in basis points. Three Months Ended March 31, Nine Months Ended March 31, 2021 2020 2021 2020 2021 2021 2020 2021 2020 2021 ($ in millions) % of Total Revenues (1) (Decrease) Increase ($ in millions) % of Total Revenues (1) (Decrease) Increase Service revenues $ 24.6 $ 78.4 24.5 % 51.0 % (2,650) $ 90.0 $ 322.1 28.6 % 52.8 % (2,420) Product revenues 20.8 34.9 20.8 22.7 (190) 68.7 124.5 21.7 20.4 130 Royalties and fees 23.5 8.7 23.5 5.7 1,780 61.4 66.1 19.4 10.8 860 Franchise rental income 31.3 31.8 31.2 20.7 1,050 95.9 96.9 30.3 15.9 1,440 Cost of service (2) 15.8 54.8 64.2 69.9 (570) 66.4 212.7 73.8 66.0 780 Cost of product (2) 21.3 21.7 102.4 62.2 4,020 54.8 75.3 79.8 60.5 1,930 Site operating expenses 13.4 3.7 13.4 2.4 1,100 37.0 62.9 11.7 10.3 140 General and administrative 24.6 31.9 24.6 20.7 390 77.4 105.2 24.5 17.3 720 Rent 8.0 18.7 8.0 12.2 (420) 34.1 63.4 10.8 10.4 40 Franchise rent expense 31.3 31.8 31.2 20.7 1,050 95.9 96.9 30.3 15.9 1,440 Depreciation and amortization 3.6 10.4 3.6 6.8 (320) 17.4 27.5 5.5 4.5 100 Long-lived asset impairment 0.8 — 0.8 — N/A 9.8 — 3.1 — N/A TBG restructuring — 0.1 — 0.1 (10) — 2.4 — 0.4 (40) Goodwill impairment — 40.2 — 26.1 (2,610) — 40.2 — 6.6 (660) Operating loss (3) (18.5) (59.4) (18.5) (38.6) 2,010 (76.9) (76.8) (24.3) (12.6) (1,170) Interest expense (3.2) (1.7) (3.2) (1.1) (210) (10.6) (4.6) (3.4) (0.8) (260) Loss from sale of salon assets to franchisees, net (4.6) (7.9) (4.6) (5.1) 50 (8.5) (26.1) (2.7) (4.3) 160 Interest income and other, net 15.1 0.1 15.1 0.1 1,500 15.6 3.2 4.9 0.5 440 Income tax benefit (4) 0.3 1.0 3.0 1.4 N/A 1.4 5.8 1.7 5.5 N/A Income from discontinued operations, net of income taxes — 0.3 — 0.2 (20) — 0.8 — 0.1 (10) _______________________________________________________________________________ (1) Cost of service is computed as a percent of service revenues. Cost of product is computed as a percent of product revenues. (2) Excludes depreciation and amortization expense. (3) Total is a recalculation; line items calculated individually may not sum to total due to rounding. (4) Computed as a percent of loss from continuing operations before income taxes. The income taxes basis point change is noted as not applicable (N/A) as the discussion within MD&A is related to the effective income tax rate. 30 Consolidated Revenues Consolidated revenues primarily include revenues of company-owned salons, product and equipment sales to franchisees, franchise royalties and fees and franchise rental income. The following tables summarize revenues and same-store sales by concept, as well as the reasons for the percentage change: Three Months Ended March 31, Nine Months Ended March 31, 2021 2020 2021 2020 (Dollars in thousands) Franchise salons: Product $ 13,079 $ 15,318 $ 41,057 $ 45,287 Royalties and fees 23,535 8,698 61,393 66,062 Franchise rental income 31,317 31,821 95,885 96,875 Total, Franchise salons $ 67,931 $ 55,837 $ 198,335 $ 208,224 Franchise salon same-store sales decrease (1) (19.3) % (4.1) % (27.6) % (1.8) % Company-owned salons: SmartStyle $ 11,056 $ 46,277 $ 43,802 $ 197,912 Supercuts 5,743 11,743 17,562 53,063 Portfolio Brands 15,537 39,926 56,284 150,387 Total, Company-owned salons $ 32,336 $ 97,946 $ 117,648 $ 401,362 Company-owned salon same-store sales decrease (2) (28.8) % (7.9) % (33.8) % (3.9) % Consolidated revenues $ 100,267 $ 153,783 $ 315,983 $ 609,586 Percent change from prior year (34.8) % (40.5) % (48.2) % (25.7) % _______________________________________________________________________________ (1) Franchise same-store sales are calculated as the total change in sales for salons that have been a franchise location for more than one year that were open on a specific day of the week during the current period and the corresponding prior period. Quarterly and year-to-date franchise same-store sales are the sum of the franchise same-store sales computed on a daily basis. Franchise salons that do not report daily sales are excluded from same-store sales. Locations relocated within a one-mile radius are included in same-store sales as they are considered to have been open in the prior period. Franchise same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation. (2) Company-owned same-store sales are calculated as the total change in sales for company-owned locations that were open on a specific day of the week during the current period and the corresponding prior period. Quarterly and year-to-date company-owned same-store sales are the sum of the company-owned same-store sales computed on a daily basis. Locations relocated within a one-mile radius are included in same-store sales as they are considered to have been open in the prior period. Company-owned same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation. 31 Three and Nine Months Ended March 31, 2021 Compared with Three and Nine Months Ended March 31, 2020 Consolidated Revenues Consolidated revenues are primarily comprised of service and product revenues, as well as franchise royalties and fees, advertising and rental income. Consolidated revenue decreased $53.5 and $293.6 million, or 34.8% and 48.2%, for the three and nine months ended March 31, 2021, respectively. Service revenue and product revenue decreased $53.8 and $14.1 million, respectively, in the three months ended March 31, 2021 and decreased $232.1 and $55.8 million, respectively, in the nine months ended March 31, 2021. The decline in service and product revenue is primarily due to the Company's sale of salons to franchisees. During the twelve months ended March 31, 2021, 519 salons were sold to franchisees, net of buy backs and 833 and 35 system-wide salons were closed and constructed, respectively (2021 Net Salon Count Changes). For the three and nine months ended March 31, 2021, the impact to consolidated revenue due to the sale of salons to franchisees and closure of salons was $44.9 and $214.0 million, respectively. System-wide sales also declined, primarily due to fewer guest visits and government-mandated closures related to the COVID-19 pandemic, in the three and nine months ended March 31, 2021, which also contributed to the decline in service, product and royalties and fees revenue. In the three months ended March 31, 2020, the Company refunded $14.9 million of previously collected cooperative advertising fees, which reduced royalties and fees in the prior period. Service Revenues The decreases of $53.8 and $232.1 million, or 68.6% and 72.0%, in service revenues during the three and nine months ended March 31, 2021, respectively, were primarily due to the 2021 Net Salon Count Changes. For the three and nine months ended March 31, 2021, the impact to service revenue due to the sale of salons to franchisees and closure of salons was $35.0 and $172.5 million, respectively. The remaining decrease in service revenue relates primarily to fewer guest visits as a result of the COVID-19 pandemic. Product Revenues The decreases of $14.1 and $55.8 million, or 40.4% and 44.9%, in product revenues during the three and nine months ended March 31, 2021, respectively, were primarily due to the 2021 Net Salon Count Changes. For the three and nine months ended March 31, 2021, the impact to product revenue due to the sale of salons to franchisees and closure of salons was $9.9 and $41.5 million, respectively. Additionally, franchise same-store product sales declined 20.0% and 24.2% for the three and nine months ended March 31, 2021, respectively, contributing to the decline. Royalties and Fees During the three months ended March 31, 2021, royalties and fees increased $14.8 million, or 170.6%, primarily due to the Company refunding cooperative advertising fund contributions in the third quarter of fiscal year 2020. During the nine months ended March 31, 2021, royalties and fees decreased $4.7 million, or 7.1%, primarily due to a $1.5 million decline in cooperative advertising funds charged to franchisees during the nine months ended March 31, 2021. For the three and nine months ended March 31, 2021, cooperative advertising funds were temporarily reduced as part of our COVID-19 pandemic relief effort and also declined due to lower same-store sales. The declines in cooperative advertising are offset in site expense and have no impact on operating income. Royalties and fees were also impacted by the decreases in franchise same-store sales of 19.3% and 27.6% for the three and nine months ended March 31, 2021, respectively, partially offset by an increase in franchise salons. Total franchised locations open at March 31, 2021 were 5,317 as compared to 5,126 at March 31, 2020. Franchise Rental Income During the three and nine months ended March 31, 2021, franchise rental income decreased $0.5 and $1.0 million, or 1.6% and 1.0%, respectively. The decrease in the three months ended March 31, 2021 is primarily due to an increase in rent considered uncollectible and to the change in the lease renewal assumption. The decrease in the nine months ended March 31, 2021 is due to the rental income from TBG salons included in fiscal year 2020 and an increase in rent considered uncollectible. Cost of Service During the three months ended March 31, 2021, cost of service as a percent of service revenues decreased 570 basis points, primarily due to payroll related COVID-19 relief tax credits. During the nine months ended March 31, 2021, cost of service as a percent of service revenues increased 780 basis points, primarily due to inefficient and non-productive stylist hours as a result of reduced guest visits related to the COVID-19 pandemic and higher minimum wages. 32 Cost of Product The 4,020 and 1,930 basis point increases in cost of product as a percent of product revenues during the three and nine months ended March 31, 2021, respectively, were primarily due to a $5.3 million reserve for excess and obsolete inventory related to the change in the Company's merchandising strategy and the shift from retail sales to franchise product sales. Excluding the excess and obsolescence reserve, margins on retail product sales were 37.4% and 47.7% in the three months ended March 31, 2021 and 2020, respectively. Margins on franchise product sales were 14.8% and 25.2% in the three months ended March 31, 2021 and 2020, respectively. Excluding the excess and obsolescence reserve, margins on retail product sales were 46.2% and 48.9% in the nine months ended March 31, 2021 and 2020, respectively. Margins on franchise product sales were 19.3% and 23.1% in the nine months ended March 31, 2021 and 2020, respectively. Decreases in franchise product margins were primarily driven by a shift to lower-margin customers and products. Site Operating Expenses Site operating expenses increased $9.7 million, or 265.2%, during the three months ended March 31, 2021 and decreased $25.9 million, or 41.3%, during the nine months ended March 31, 2021. Site operating expenses during the three months ended March 31, 2020 were reduced by the refunding of $14.9 million of previously collected advertising fees in the prior period, as noted above in Royalties and fees. Excluding the refund, site operating expenses decreased due to a net reduction in salon counts and decreases in marketing spend. The decrease in site operating expenses during the nine months ended March 31, 2021 was primarily due to a net reduction in salon counts and decreases in marketing spend, partially offset by a $1.5 million increase in cooperative advertising expense, as noted above in Royalties and fees. General and Administrative The decreases of $7.3 and $27.8 million, or 22.9% and 26.4%, in general and administrative (G&A) during the three and nine months ended March 31, 2021, respectively, were primarily due to lower administrative and field management salaries due to reductions in headcount as we align our cost structure with our transition to an asset-light franchise model. A benefit from the forfeiture of equity awards related to the departure of the Company's former CEO contributed $2.4 million to the decrease in the nine months ended March 31, 2021. Additionally, $1.3 million of the decline in the nine months ended March 31, 2021 is due to the Company not holding its annual franchise convention in fiscal year 2021 due to the COVID-19 pandemic. Rent The decreases of $10.7 and $29.3 million, or 57.1% and 46.2%, in rent expense during the three and nine months ended March 31, 2021, respectively, were primarily due to the net reduction in the number of company-owned salons associated with the Company's transformation to a fully-franchised portfolio. Franchise Rent Expense During the three and nine months ended March 31, 2021, franchise rent expense decreased $0.5 and $1.0 million, or 1.6% and 1.0%, respectively. The decrease in the three months ended March 31, 2021 is primarily due to an increase in rent considered uncollectible and the change in the lease renewal assumption. The decrease in the nine months ended March 31, 2021 is due to the rental income from TBG salons included in fiscal year 2020 and an increase in rent considered uncollectible. Depreciation and Amortization The decreases of $6.8 and $10.1 million, or 65.1% and 36.8%, in depreciation and amortization during the three and nine months ended March 31, 2021, respectively, were primarily due to the net reduction in company-owned salon counts. Additionally, salon asset impairment of $1.2 and $3.9 million were recorded to depreciation expense in the three and nine months ended March 31, 2020, respectively. Salon asset impairment in fiscal year 2021 was recorded to long-lived asset impairment. Long-Lived Asset Impairment In the three and nine months ended March 31, 2021, the Company recorded a long-lived asset impairment charge of $0.8 and $9.8 million, respectively, which included a right of use asset impairment charge of $0.3 and $6.3 million, respectively, and salon asset impairment of $0.5 and $3.5 million, respectively. Prior to the COVID-19 pandemic that began in fiscal year 2020, the Company had not recorded a right of use asset impairment charge. 33 TBG Mall Location Restructuring In the three and nine months ended March 31, 2020, the Company recorded $0.1 and $2.4 million, respectively, of TBG restructuring charges, which related to professional fees and the Company assisting TBG with operating expenses to mitigate the risk of default associated with TBG's lease obligations. See Note 3 to the unaudited Condensed Consolidated Financial Statements. Goodwill Impairment The Company recorded $40.2 million of goodwill impairment for the three and nine months ended March 31, 2020. Management concluded that the COVID-19 pandemic in March 2020 was a triggering event requiring an assessment of the Company’s goodwill. The Company concluded the carrying value of the Company-owned reporting unit exceeded its fair value resulting in a full impairment. Interest Expense The increases of $1.5 and $6.0 million in interest expense for the three and nine months ended March 31, 2021, respectively, were primarily due to the increased interest rate and greater levels of debt. Loss from sale of salon assets to franchisees, net In the three and nine months ended March 31, 2021, the loss from sale of salon assets to franchisees was $4.6 and $8.5 million, respectively. In the three and nine months ended March 31, 2020, the loss from the sale of salon assets to franchisees was $7.9 and $26.1 million, respectively, including non-cash goodwill derecognition of $17.5 and $77.0 million, respectively. There was no goodwill derecognition in fiscal year 2021 due to the company-owned goodwill impairment in the third quarter of fiscal year 2020. Interest Income and Other, net The increases of $15.0 and $12.4 million, respectively, in interest income and other, net during the three and nine months ended March 31, 2021 were primarily due to the gain associated with the leases for the Company's distribution centers (see Note 11 to the unaudited Condensed Consolidated Financial Statements), partially offset by the sale of the Company's headquarters recorded in the period ended December 31, 2019. Income Taxes During the three and nine months ended March 31, 2021, the Company recognized tax benefits of $0.3 and $1.4 million, respectively, with corresponding effective tax rates of 3.0% and 1.7% as compared to recognizing tax benefits of $1.0 and $5.8 million, respectively, with corresponding effective tax rates of 1.4% and 5.5% during the three and nine months ended March 31, 2020. See Note 6 to the unaudited Condensed Consolidated Financial Statements. Income from Discontinued Operations Income from discontinued operations was $0.3 and $0.8 million during the three and nine months ended March 31, 2020, respectively, due to actuarial insurance reserve adjustments. Similar adjustments did not occur in the three and nine months ended March 31, 2021. 34 Results of Operations by Segment Based on our internal management structure, we report two segments: Franchise salons and Company-owned salons. See Note 13 to the unaudited Condensed Consolidated Financial Statements. Significant results of operations are discussed below with respect to each of these segments. Franchise Salons Three Months Ended March 31, Nine Months Ended March 31, 2021 2020 Increase (Decrease) 2021 2020 Increase (Decrease) (Dollars in millions) (Dollars in millions) Revenue Product 13.1 15.3 (2.2) 41.1 45.3 (4.2) Royalties and fees 23.5 8.7 14.8 61.4 66.1 (4.7) Franchise rental income 31.3 31.8 (0.5) 95.9 96.9 (1.0) Total franchise salons revenue (1) $ 67.9 $ 55.8 $ 12.1 $ 198.3 $ 208.2 $ (9.9) Franchise same-store sales (2) (19.3) % (4.1) % (27.6) % (1.8) % Operating income $ 12.0 $ 11.2 $ 0.8 $ 28.7 $ 35.8 $ (7.1) Operating loss from TBG restructuring — (0.1) 0.1 — (2.4) 2.4 Total operating income (1) $ 12.0 $ 11.1 $ 0.9 $ 28.7 $ 33.4 $ (4.7) _______________________________________________________________________________ (1) Total is a recalculation; line items calculated individually may not sum to total due to rounding. (2) Franchise same-store sales are calculated as the total change in sales for salons that have been a franchise location for more than one year that were open on a specific day of the week during the current period and the corresponding prior period. Quarterly and year-to-date franchise same-store sales are the sum of the franchise same-store sales computed on a daily basis. Franchise salons that do not report daily sales are excluded from same-store sales. Locations relocated within a one-mile radius are included in same-store sales as they are considered to have been open in the prior period. Franchise same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation. Franchise same-store sales by concept are detailed in the table below: Three Months Ended March 31, Nine Months Ended March 31, 2021 2020 2021 2020 SmartStyle (18.1) % (10.9) % (25.8) % (8.6) % Supercuts (21.5) (3.3) (29.4) (0.9) Portfolio Brands (15.1) (3.5) (24.6) (1.7) Total (19.3) % (4.1) % (27.6) % (1.8) % 35 Franchise Salon Revenues Franchise salon revenues increased $12.1 million during the three months ended March 31, 2021 and decreased $9.9 million during the nine months ended March 31, 2021. The increase in franchise salon revenue during the three months ended March 31, 2021 was primarily due to the refund of previously collected contributions to the cooperative advertising funds in the third quarter of fiscal year 2020. The decrease in franchise salon revenue during the nine months ended March 31, 2021 was primarily due to decreases in royalties and cooperative fund contributions due to the COVID-19 pandemic. During the twelve months ended March 31, 2021, franchisees constructed (net of relocations) and closed 31 and 359 Franchise-owned salons, respectively, and purchased (net of Company buybacks) 519 salons from the Company during the same period. Franchise Salon Operating Income During the three months ended March 31, 2021, franchise salon operations generated operating income of $12.0 million, an increase of $0.9 million compared to the prior comparable period. During the nine months ended March 31, 2021, franchise salon operations generated operating income of $28.7 million, a decrease of $4.7 million compared to the prior comparable period. The increase in the three months ended March 31, 2021 was primarily due to an increase in franchise fees due to the increase in salon count. The decrease in the nine months ended March 31, 2021 was primarily due to the decrease in royalties due to the COVID-19 pandemic. 36 Company-owned Salons Three Months Ended March 31, Nine Months Ended March 31, 2021 2020 Increase (Decrease) (1) 2021 2020 Increase (Decrease) (1) (Dollars in millions) (Dollars in millions) Total revenue $ 32.3 $ 97.9 $ (65.6) $ 117.6 $ 401.4 $ (283.7) Company-owned same-store sales (28.8) % (7.9) % (33.8) % (3.9) % Operating loss $ (12.6) $ (50.7) $ 38.0 $ (50.7) $ (46.4) $ (4.4) _______________________________________________________________________________ (1) Total is a recalculation; line items calculated individually may not sum to total due to rounding. Company-owned same-store sales by concept are detailed in the table below: Three Months Ended March 31, Nine Months Ended March 31, 2021 2020 2021 2020 SmartStyle (24.4) % (9.0) % (33.3) % (3.8) % Supercuts (34.1) (6.7) (38.0) (4.9) Portfolio Brands (28.4) (6.5) (32.4) (3.5) Total (28.8) % (7.9) % (33.8) % (3.9) % Company-owned Salon Revenues Company-owned salon revenues decreased $65.6 and $283.7 million during the three and nine months ended March 31, 2021, respectively, primarily due to the 2021 Net Salon Count Changes and a decline in sales as a result of the COVID-19 pandemic. Company-owned same-store sales decreased 28.8% and 33.8% during the three and nine months ended March 31, 2021, respectively, due primarily to decreases in same-store guest transactions. Company-owned Salon Operating Loss During the three months ended March 31, 2021, company-owned salon operating loss decreased $38.0 million to a loss of $12.6 million, and during the nine months ended March 31, 2021, company-owned salon operating loss increased $4.4 million to a loss of $50.7 million compared to the prior comparable period. The decrease in the loss during the three months ended March 31, 2021 was primarily due to the goodwill impairment of $40.2 million recorded in the third quarter of fiscal year 2020. The increase in the loss during the nine months ended March 31, 2021 was primarily due to the overall decline in margin related primarily to COVID-19 and a $5.3 million inventory reserve charge recorded in the third quarter of fiscal year 2021, partially offset by the goodwill impairment recorded in the third quarter of fiscal year 2020. Corporate Corporate Operating Loss Corporate operating loss decreased $1.9 million during the three months ended March 31, 2021, primarily driven by lapping stock compensation benefits associated with a change in performance awards assumptions and executive departures in fiscal year 2020, as well as higher severance costs in fiscal year 2021. Corporate operating loss decreased $8.9 million during the nine months ended March 31, 2021, primarily driven by lower general and administrative salaries due to lower headcount and the cancellation of the traditional in-person franchise convention in fiscal year 2021. 37 LIQUIDITY AND CAPITAL RESOURCES Sources of Liquidity Funds generated by operating activities, available cash and cash equivalents, proceeds from sale of salon assets to franchisees, and our borrowing agreements are our most significant sources of liquidity. As of March 31, 2021, cash and cash equivalents were $34.5 million, with $32.0 and $2.5 million within the United States and Canada, respectively. The Company's borrowing arrangements include a $295.0 million five-year revolving credit facility that expires in March 2023, of which $98.8 million was available as of March 31, 2021. The Company's liquidity, which includes the unused available balance under the credit facility and unrestricted cash and cash equivalents, totaled $133.3 million as of March 31, 2021. As of March 31, 2021, the revolving credit facility has a minimum liquidity covenant of $75.0 million (see Note 11 to the unaudited Condensed Consolidated Financial Statements). In accordance with the credit agreement, beginning with periods ending June 30, 2021, the Company’s minimum liquidity calculation will be adjusted related to certain net cash proceeds generated from historical venditions. The Company expects that as of June 30, 2021, after using the vendition proceeds adjustment, the minimum liquidity covenant will change such that the unused available balance under the credit facility and unrestricted cash and cash equivalents be in the range of $53-$55 million. On February 3, 2021, the Company filed a $150 million shelf registration and $50 million prospectus supplement with the Securities and Exchange Commission under which it may offer and sell, from time to time, up to $50 million worth of its of its Class A common stock in “at-the-market offerings.” Net proceeds from sales of shares under the “at-the-market” program, if any, may be used to, among other things, fund working capital requirements, repay debt and support of our growth strategies. Such strategies may include positioning the Company for potential expansion through targeted industry acquisitions and alternatives to fund additional capital investment requirements related to potential partnership opportunities to facilitate continued growth of our proprietary technology, Opensalon® Pro. The timing and amount of sales of shares, if any, will depend on a variety of factors, including prevailing market conditions, the trading price of shares, and other factors as determined by the Company. No shares have been issued under the shelf registration. Uses of Cash The Company closely manages its liquidity and capital resources. The Company's liquidity requirements depend on key variables, including the level of investment needed to support its business strategies, the performance of the business, capital expenditures, credit facilities and borrowing arrangements, and working capital management. Capital expenditures are a component of the Company's cash flow and capital management strategy, which can be adjusted in response to economic and other changes to the Company's business environment. The Company has a disciplined approach to capital allocation, which focuses on investing in key priorities to support the Company's response to the COVID-19 pandemic, as well as its multi-year strategic plan as discussed within Part I, Item 1 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2020. 38 Cash Flows Cash Flows from Operating Activities During the nine months ended March 31, 2021, cash used in operating activities was $80.0 million. Cash used in operations increased due to lower revenues and margins, payments of $14.0 million to catch up on payables related to fiscal year 2020, and the CEO sign-on bonus of $2.5 million, partially offset by the elimination of certain general and administrative costs and a $0.8 million COVID-19 payroll relief payment from the Canadian government received in the third quarter of fiscal year 2021. Cash Flows from Investing Activities During the nine months ended March 31, 2021, cash used in investing activities of $0.9 million was primarily capital expenditures of $9.6 million, of which approximately $3.0 million was internally developed capitalized software, partially offset by proceeds from the sale of salon assets of $7.7 million. Cash Flows from Financing Activities During the nine months ended March 31, 2021, cash used in financing activities was $1.6 million compared to cash provided by financing activities of $152.1 million in the prior comparable period. In the nine months ended March 31, 2020, the Company borrowed a net $183.0 million and used $28.2 million to purchase common stock. Financing Arrangements See Note 11 of the Notes to the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 and Note 8 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020, for additional information regarding our financing arrangements. 39 Debt to Capitalization Ratio Our debt to capitalization ratio, calculated as the principal amount of debt as a percentage of the principal amount of debt and shareholders’ equity at fiscal quarter end, was as follows: As of Debt to Capitalization (1) Basis Point Increase (Decrease) (2) March 31, 2021 78.2 % 1,620 June 30, 2020 62.0 % 3,520 _______________________________________________________________________________ (1) Debt includes long-term debt and financing liabilities. It excludes long-term lease liability as that liability is offset by the right of use asset. (2) Represents the basis point change in debt to capitalization as compared to the prior fiscal year end (June 30, 2020 and June 30, 2019, respectively). The 1,620 basis point increase in the debt to capitalization ratio as of March 31, 2021 as compared to June 30, 2020, was primarily due to the decreases in shareholders' equity as a result of the loss from operations, partially offset by the decrease in debt as a result of the derecognition of the Company's financing lease liability (see Note 11 to the unaudited Condensed Consolidated Financial Statements). Share Repurchase Program In May 2000, the Company’s Board of Directors (Board) approved a stock repurchase program with no stated expiration date. Since that time and through March 31, 2021, the Board has authorized $650.0 million to be expended for the repurchase of the Company's stock under this program. All repurchased shares become authorized, but unissued shares of the Company. The timing and amounts of any repurchases depend on many factors, including the market price of the common stock and overall market conditions. During the three and nine months ended March 31, 2021, the Company did not repurchase any shares. As of March 31, 2021, 30.0 million shares have been cumulatively repurchased for $595.4 million, and $54.6 million remains outstanding under the approved stock repurchase program. 40 SAFE HARBOR PROVISIONS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Quarterly Report on Form 10-Q, as well as information included in, or incorporated by reference from, future filings by the Company with the Securities and Exchange Commission and information contained in written material, press releases and oral statements issued by or on behalf of the Company contains or may contain “forward-looking statements” within the meaning of the federal securities laws, including statements concerning anticipated future events and expectations that are not historical facts. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this document reflect management’s best judgment at the time they are made, but all such statements are subject to numerous risks and uncertainties, which could cause actual results to differ materially from those expressed in or implied by the statements herein. Such forward-looking statements are often identified herein by use of words including, but not limited to, “may,” “believe,” “project,” “forecast,” “expect,” “estimate,” “anticipate,” and “plan.” These uncertainties include a potential material adverse impact on our business and results of operations as a result of the uncertain duration and severity of the COVID-19 pandemic, as well as the health and risk appetite of our stylists, customers and employees to return to the salon environment; the continued ability of the Company to implement its strategy, priorities and initiatives including the re-engineering of our corporate and field infrastructure; Opensalon® Pro may not yield the intended results on timing and amounts due to the COVID-19 pandemic, efforts by our current third-party back office management system vendor to make it difficult for our franchisees to convert to our new company-owned system and the pending litigation with that third-party vendor; the impact of the COVID-19 pandemic on our key suppliers; the ability to address rent obligations incurred during the government-mandated hibernation of our salons related to the COVID-19 pandemic and the ability to obtain long-term rent concessions; the ability to operate or sell the salons transferred back from TBG; the outcome of the review by the administrator in TBG's insolvency proceedings in the United Kingdom; compliance with credit facility covenants and access to the existing revolving credit facility; our and our franchisees' ability to attract, train and retain talented stylists; financial performance of our franchisees; success of the sale of salons to franchisees; if our capital investments in technology do not achieve appropriate returns; our ability to manage cyber threats and protect the security of potentially sensitive information about our guests, employees, vendors or Company information; the ability of the Company to maintain a satisfactory relationship with Walmart; the impact of recent actions by Walmart; marketing efforts to drive traffic to our franchisees' salons; changes in regulatory and statutory laws including increases in minimum wages; our ability to maintain and enhance the value of our brands; premature termination of agreements with our franchisees; reliance on information technology systems; reliance on external vendors; consumer shopping trends and changes in manufacturer distribution channels; competition within the personal hair care industry; continued ability to compete in our business markets; the continued ability to maintain an effective system of internal controls over financial reporting; changes in tax exposure; failure to standardize operating processes across brands; financial performance of Empire Education Group; the continued ability of the Company to implement cost reduction initiatives; changes in economic conditions; changes in consumer tastes and fashion trends; failure at our distribution centers; exposure to uninsured or unidentified risks; reliance on our management team and other key personnel; new merchandising strategy or other factors not listed above. Additional information concerning potential factors that could affect future financial results is set forth under Item 1A on Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, your attention is directed to any further disclosures made in our subsequent annual and periodic reports filed or furnished with the SEC on Forms 10-K, 10-Q and 8-K and Proxy Statements on Schedule 14A. 41 Item 3. Quantitative and Qualitative Disclosures about Market Risk We are exposed to market risk from changes in interest rates and changes in foreign currency exchange rates. There has been no material change to the factors discussed within Part II, Item 7A in the Company’s June 30, 2020 Annual Report on Form 10-K.